Bitcoin, the first and most valuable cryptocurrency, has grown from a fringe experiment into one of the hottest tickets in global finance.
Bitcoin is a form of digital cash that eliminates the need for central authorities such as banks or governments. Instead, Bitcoin uses a peer-to-peer internet network to confirm purchases directly between users.
Launched in 2009 by a mysterious developer known as Satoshi Nakamoto, Bitcoin (BTC) was the first, and most valuable, entrant in the emerging class of assets known as cryptocurrencies.
Each Bitcoin is a file stored in a digital wallet on a computer or smartphone. To understand how the cryptocurrency works, it helps to understand these terms and a little context:
Blockchain: Bitcoin is powered by open-source code known as blockchain, which creates a shared public history of transactions organized into “blocks” that are “chained” together to prevent tampering. This technology creates a permanent record of each transaction, and it provides a way for every Bitcoin user to operate with the same understanding of who owns what.
Private and public keys: A Bitcoin wallet contains a public key and a private key, which work together to allow the owner to initiate and digitally sign transactions. This unlocks the central function of Bitcoin — securely transferring ownership from one user to another.
Bitcoin mining: Users on the Bitcoin network verify transactions through a process known as mining, which is designed to confirm that new transactions are consistent with other transactions that have been completed in the past. This ensures that you can’t spend a Bitcoin you don’t have, or that you have previously spent.
New Bitcoins are created as part of the Bitcoin mining process, in which they are offered as a lucrative reward to people who operate computer systems that help to validate transactions.
Bitcoin miners — also known as “nodes” — are the owners of high-speed computers which independently confirm each transaction, and add a completed “block” of transactions to the ever-growing “chain,” which has a complete, public and permanent record of every Bitcoin transaction.
If you decide to buy Bitcoin, you’ll need a place to store it. Bitcoins can be stored in two kinds of digital wallets:
Hot wallet: You can often store cryptocurrency on exchanges where it is sold. Other providers offer standalone online storage. Such solutions provide access through a computer browser, desktop or smartphone app.
Cold wallet: An encrypted portable device much like a thumb drive that allows you to download and carry your Bitcoins.
Basically, a hot wallet is connected to the internet; a cold wallet is not. But you need a hot wallet to download Bitcoins into a portable cold wallet.